15 May 2001 External T.I. 2001-0072845 - TRANSFERS OF RIGHTS TO INCOME

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues: Whether our position that, where the legislation precludes a corporation from being registered as a mutual fund salesperson, we will not accept the reporting of income from the sale of mutual funds by a corporation (even if there is a bona fide employment contract between the corporation and the individual under which this income is assigned to the corporation) should be reconsidered in light of Dr. H. Hoyle Campbell (80 DTC 6239), Jerome Wallsten (1999-5116(IT)I) and Lakeside Properties Ltd. (1999-5117(IT)I).

Position: We are awaiting formal legal advice.

Reasons: In our view, the facts in Campbell are distinguishable from those in the case of mutual fund salespersons. For example, in Campbell, it was found that a corporation was operating a hospital, which was permitted under provincial laws, rather than practicing medicine, which was not permitted under such laws. In so far as the impact of Jerome Wallsten and Lakeside Properties Ltd., we are consulting with our legal advisors to determine the impact, if any, that the decisions may have on our current position.

Question 10

Tax treatment of commissions earned by an individual but payable to a corporation controlled by the individual

In the past, the CCRA has been asked about the appropriate tax treatment of mutual fund commissions paid to a corporation where the controlling shareholder must be the registered salesperson in the particular jurisdiction. In an interpretation letter in January 2000 (document 1999-0005178) the Agency stated:

"Where the legislation of such a jurisdiction precludes a corporation from being registered as a salesperson, the assignment of commissions earned by a registered individual salesperson to that individual's corporation will not preclude the individual from being taxed on the commissions earned".

A recent Tax Court of Canada case has reached a different conclusion. In the cases of Jerome Wallsten (1999-5116(IT)I) and Lakeside Properties Ltd. (1999-5117(IT)I) vs. the Queen, the Court ruled in favour of the taxpayer. In those cases, the Appellant was a life insurance agent, licensed with Sun Life of Canada. Mr. Wallsten was a shareholder, director and employee of Lakeside and his wife and children owned the other issued and outstanding shares.

Prior to 1996, Mr. Wallsten was an employee of Sun Life. Effective January 1, 1996, Mr. Wallsten entered into a written contract with Sun Life under which he agreed to sell products of that company while being free to carry on other business activities by also representing other insurance companies. Even though Sun Life would not issue a license in a limited company's name, Mr. Wallsten wished to have all insurance income in Lakeside and be paid a salary by Lakeside, like any other employee. To obtain this result Mr. Wallsten deposited all cheques payable to him from Sun Life in Lakeside's bank account.

The Agency regarded all the income and expenses as that of Mr. Wallsten and reassessed him accordingly.

In the submission of the Counsel for the Appellants, it was noted that Mr. Wallsten could have received and retained the commissions and Lakeside could have charged him a management fee for an equal amount and the result would have been the same. Perhaps the more compelling argument, however, was a reference to Her Majesty the Queen vs. Dr. H. Hoyle Campbell, 80 DTC 6239, a Supreme Court of Canada decision.

Dr. Campbell incorporated a company to operate a private hospital. He owned all the shares of the company, it employed him and paid him a salary and, in return, he paid to the company all the fees for medical services which he received from the Provincial Health Insurance Plan. While the facts indicated that fees under the provincial health plan were required to be paid to the doctor, the Court found that this was not the controlling factor when there was a valid arrangement between Dr. Campbell and the company regarding the salary to Dr. Campbell and an accounting of fees to the company as employer. It was decided that the income from the professional services provided by Dr. Campbell was the income of the company.

Consistent with the reasoning of the Supreme Court of Canada in the Campbell decision, the Tax Court found that the "fact that the agreement between them was in violation of Wallsten's contract with Sun Life does not affect tax liability". [emphasis added] The Tax Court thus decided that the appeals should be allowed.

In light of the Wallsten and Campbell decisions, will the Agency reconsider its position in circumstances where commissions in respect of the sale of insurance and mutual fund products are paid to an individual and then assigned to a corporation pursuant to a valid business arrangement between the individual and the corporation?

CCRA's Response

• Our position in IT-189R2, that a corporation may not be recognized as carrying on a professional practice if the provincial law or the regulatory body for the particular profession provides that only individuals may practice the profession, is a longstanding position.
• It is our general view that, where the legislation precludes a corporation from being registered as a mutual fund salesperson, we will not accept the reporting of income from the sale of mutual funds by a corporation, even if there is a bona fide employment contract between the corporation and the individual under which this income is assigned to the corporation.
• In our view, the facts in Campbell are distinguishable from those in the case of mutual fund salespersons. For example, in Campbell, it was found that a corporation was operating a hospital, which was permitted under provincial laws, rather than practicing medicine, which was not permitted under such laws.
• Insofar as the impact of Jerome Wallsten and Lakeside Properties Ltd., we are consulting with our legal advisors to determine the impact, if any, that the decisions may have on our current position. We will provide our comments on these cases in a future issue of the Income Tax Technical News.